The Government claims it would rather lose the election responsibly than win it irresponsibly. Looking at the long history of damaging pre-election tax-cuts and interest rate drops, David Smith is sceptical.
For anyone interested in a stable, steadily growing economy, an event is looming which should give considerable cause for concern. I refer, of course, to the general election, the run-up to which appeared to start on roughly 10 April 1992 - the day after the last one - but which will reach a crescendo in the coming months, even if John Major's Government manages to hang on until May 1997, the present parliament's maximum span.
Elections, for those who have short memories, have a record as long as your arm of grievous bodily harm to the economy. Let me remind you of a few recent examples. In 1979, Margaret Thatcher's first electoral triumph, the election campaign was preceded by the infamous winter of discontent of industrial relations conflict when, as the Conservative party still reminds us, the dead went unburied and the rubbish piled up in the streets. The Labour Government set up a commission, under Professor Hugh Clegg, to report on public sector pay. The Conservatives, in a moment of madness, promised to honour its findings. The result was a post-election pay explosion, which pushed inflation up to 22% by May 1980, a year after the election, but which also ran up against the newly-elected Thatcher Government's monetarist policies, giving us the 1980-1 recession, which did untold damage to industry.
The pre-election boom of '87
The 1983 election wrought relatively little mischief, probably because Labour was so ineffectual in opposition that the Government did not need to take any risks with the economy to secure a victory. But it was the exception that proves the rule. A year before the 1987 election, the Conservative leadership was in deep gloom, mainly because unemployment was still rising, as it had done more or less continually since May 1979. So Nigel Lawson - then Chancellor - engineered a good old-fashioned pre-election boom, through a combination of tax cuts and lower interest rates. Worse, he persisted with it after the election - the 1988 budget contained the biggest tax cuts in modern times - and the consequence of the inflationary boom was the 1990-2 bust.
When it comes to election-inflicted damage on the economy, the 1992 general election was as bad as any. John Major took over as prime minister at the end of 1990. One normal mechanism for stimulating the economy ahead of the election - aggressive cuts in interest rates - was closed to him, not only because inflation was coming down only gradually from its double-figure boom level, but more particularly because sterling was constrained by membership of the ERM, into which he had triumphantly taken it. So the stimulus had to come through fiscal policy; notably through a huge pre-election relaxation in public spending.
The direct result of that pre-election policy was the huge public sector borrowing requirement (PSBR), which came up not far short of £50 billion in the 1993-4 fiscal year. That loss of control of the public finances has dominated economic policy, damagingly, throughout the present parliament. If it survives until May 1977 public borrowing will have been well in excess of £150 billion over five years.
Why tax cuts are affordable
My case, I think, is proven. But surely, I hear you say, this one will be different. The Prime Minister, together with Kenneth Clarke, the Chancellor, are pledged not to return to the unstable boom-bust policies of the past. Going by their words, they would rather lose the next election responsibly than win it irresponsibly.
But think back to November and the last budget. Clarke unveiled a PSBR forecast of £22.5 billion for 1996-7. But he also announced £3 billion of tax cuts, aimed at the personal sector. A year earlier, his PSBR forecast for the following year was £21 billion, but he had solemnly told the House of Commons that tax cuts were not affordable. The only explanation for the presence of tax cuts in the November 1995 budget, and their absence in November 1994, was the fact that the later budget was a year closer to the general election. Now, when tax cuts are plainly for political reasons, and add to an already large borrowing requirement, I begin to get a little nervous. On the monetary policy front there is less scope for danger from wrong decisions because, in my view, the inflation threat is negligible. It is also the case that, even if interest rates needed to rise, the imminence of the election would probably stand in the way of such a move.
Pressure on the pound
A second broad problem with elections is their effect on the financial markets. In 1992, with the three main parties all fully committed to sterling's membership of the ERM, the markets detected no discernible political risk for the pound. This time, the range of possibilities is wider. Labour is keener on European monetary union and UK participation in a single currency than the Government. This might create the topsy-turvy position where sterling would strengthen on the foreign exchanges in anticipation of an opposition victory. Either way, it could be bumpy.
Finally, there will be an economic effect if there is a change of government at the election. The Conservative's period in office, 18 years if the parliament goes to its full term, is easily a post-war record. When an ambitious Labour party took office in 1964 after 13 years in opposition it found that its programme for expansion ran up against the reality of an enfeebled economy. As a result it embarked on a long and ultimately unsuccessful battle to avoid devaluation.
This time the threat to Labour's plans comes from pay, and its consequences for inflation. After years of being squeezed, the public sector unions will be looking for a significant wage dividend. This will be compounded by Labour's promise to introduce a national minimum wage at around 50% of male average earnings. On present indications, the political landscape is set to change in the near future. So, too, will the labour market environment.